Expat tax: Financial emigration could cost you - and it's not so simple, experts warn

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South Africans working abroad should not opt for financial emigration as a knee-jerk reaction to new expatriate tax laws, cautions Gavin Smith, global financial solutions firm deVere Acuma's head in Africa.

Financial emigration is an exchange control matter whereby a South African can - with the approval of the SA Reserve Bank (SARB) - become classified as a non-resident of the country for tax purposes.

Smith says changing your tax residence status is just one possible option for expats.

Fin24 reported earlier that, due to changes in legislation, South African tax residents working abroad will be required to pay tax of up to 45% on their foreign employment income which exceeds R1m.

This will come into effect as from March 1, 2020 and will include benefits which forms part of the employment package such as travel, housing and even security.

As a result, the option of "financial emigration" has been raised by some tax practitioners and financial advisors.

"Financial emigration, however, does not automatically equate to non-residence. It is not as simple a solution as it seems," cautions Smith.

He explains that, for many South Africans living abroad, financial emigration may mean that they will not be able to achieve their ultimate financial goal of retiring in SA.

Failed emigration

"While this may not seem concerning at present, aspirations change with time and age, as do family circumstances," says Smith.

"Should an expatriate return to SA within five years after financial emigration, the SA Revenue Service (SARS) will deem it a failed emigration and all taxes for that period will be liable."

There is also an inevitable financial burden when one goes from paying no tax at all to paying tax in the currency of the host country.

Furthermore, the exit charge for tax emigration from a capital gains perspective is at a minimum effective rate of 18% on worldwide assets.

In Smith's view, investing in a foreign pension scheme in primary currencies could be an effective option of storing foreign income in a tax efficient way.

He emphasises that these kinds of investments should only be entered into once one has obtained sound financial advice.

According to Hilary Dudley, managing director of specialist wealth manager Citadel Fiduciary, there is currently a lot of misinformation doing the rounds about financial emigration.

She says financial emigration does not necessarily exempt you from paying tax in SA.

"In spite of emigrating, you are still liable to pay tax on any South African-sourced income and may also be found to be tax resident," she says.

"Exchange control residence and tax residence are two different issues, although formal emigration is a way to show the intention to break your tax residence which has a capital gains tax implication."

Like Smith, she too emphasises the importance obtaining the correct advice from a qualified tax practitioner before making any decisions or applications.

She points out that expats who have not been submitting tax returns in SA - although they are still South African tax residents and should have done so - are in debt to SARS and financial emigration will not fix their tax compliance issue in retrospect.

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